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Sunday, February 13, 2011

A Policy Dilemma: Budget Deficit vs. Infrastructure Deficit

As the federal budget season moves into full swing, infrastructure is not only on the table, but in the center of the table. The Obama administration budget, which would cut some areas of spending and freeze others, calls for more infrastructure spending, including high-speed rail, wireless Internet, and modernization of the electric grid. Across the aisle, House Republican leaders, vowing to "leave no stone unturned and allowing no agency or program to be held sacred," envision infrastructure cuts, including Amtrak, EPA grants for municipal clean water, and other programs. Some Republicans want to outdo the leadership and cap federal spending at 20 percent of GDP, something that would require even more drastic infrastructure cuts.

Who is right? Is infrastructure spending an essential investment in our future or a morass of waste and boondoggles? Where can we safely prune the infrastructure budget, and where can we not?

A good place to start is to ask why we are concerned with the budget deficit in the first place. The cliché is that we do not want to be the first generation to leave our children a national balance sheet with a thinner margin between assets and liabilities than we inherited from our parents.
The trouble is, the federal budget deficit is not the only thing that shapes the national balance sheet. There is also an infrastructure deficit--the difference between what the country invests each year in new bridges, sewers, and power lines and the rate at which the old ones fall apart. If investment in infrastructure exceeds depreciation, the country is that much richer at the end of the year. If depreciation exceeds investment, it is poorer, as surely as if the Treasury sells bonds and uses the proceeds for the most shortsighted spending programs you can think of.

If you have any doubt that the infrastructure deficit is real, try taking a look at the Report Card for America's Infrastructure published periodically by the American Society of Civil Engineers (ASCE). The Report Card assigns grades of "A" through "F" to various infrastructure categories. In the latest report, no area rates higher than a "C+." Roads, aviation, and transit system all declined in score from the previous report, which was issued in 2005. Dams, schools, drinking water, and wastewater stagnated at grades of D or lower. Just one category, energy, improved, from a D to a D+.

Consider dams, for example.There are more than 85,000 dams in the United States with an average age over 50 years. Some 4,000 dams are rated as deficient, including 1,819 high hazard dams. As the following chart shows, for every deficient high hazard potential dam repaired in recent years, two more were declared deficient.

The same story repeats itself in one category of infrastructure after another. The Report Card estimates 5-year infrastructure spending needs at $2.2 trillion. Actual spending is expected to be less than half of that. The 2009 fiscal stimulus package, the American Recovery and Reinvestment Act (ARRA), included $72 billion for infrastructure upgrades, but that was enough to cover only six percent of the 5-year infrastructure deficit estimated by the ASCE.

These realities suggest why we have to be very careful when cutting infrastructure spending. Cuts to essential repairs and upgrades will decrease the federal budget deficit only at the cost of increasing the infrastructure deficit. The trade-off is especially unfavorable when deferred maintenance leads to costly catastrophic failures. And realistically, just eliminating the infrastructure deficit isn't enough. Future economic growth will require an infrastructure surplus, so that wireless communication networks and renewable energy grids can be built at the same time needed repairs are made to aging sewers and bridges.

Still, although cut, cut, cut is not the right approach to infrastructure, spend, spend, spend isn't the answer, either. The problem is, not all infrastructure projects are created equal. Spending on roads, sewers, and parks has a reputation for pork-barreling and corruption that is all too often deserved. If your community is anything like mine, you probably can't drive to the store without "benefiting" from some infrastructure project that has no visible purpose other than generating revenue for some politically connected contractor. Is there any way to separate the wheat from the chaff?

Another useful infrastructure report, this one from the Bipartisan Policy Center, tries to address that question. Although it focuses specifically on transportation infrastructure, it makes some common sense recommendations that are more widely applicable.

Beware of putting new, borrowed money into existing distribution channels. Those channels tend to share out funds on political grounds rather than zeroing in on the most productive projects. It would be better not to spend at all than to spend without rational prioritization.

At this stage of the recovery, the highest priority should go to projects that are both shovel-ready and consistent with long-term productivity standards. That is not an argument against budgeting funds now for planning and design of long-term projects like high-speed rail, in order to move them along to the shovel-ready stage. But funds for such projects will never become available if debt is piled on now to fund unproductive, short-term make-work projects.

Be skeptical of the "jobs multiplier" rationale for infrastructure projects. Focus on the outputs from infrastructure spending, not the inputs.

Unfortunately, these principles are easier to state than they are to implement. At present, the government's budget process seems to be moving away from them, not toward them. Since the onset of the global economic crisis, far too much infrastructure money has been spent on an ad-hoc basis, with specific projects thrown in as "sweeteners" to get bills like TARP and the ARRA through Congress or added as earmarks to unrelated legislation. Congress seems completely to have abandoned the kind of orderly budgeting-authorization-appropriation process that is supposed to allow considered evaluation of individual spending proposals. Instead, we get omnibus spending bills and across-the-board freezes that spend and cut without any sense of priorities.

In short, dams and electric grids are not the only things in need of essential upgrades. President Obama is right that "we can't expect tomorrow's economy to take root using yesterday's infrastructure," and that goes for the infrastructure of budget policy rules, too.

Follow this link to view or download a short slideshow on infrastructure spending.

4 comments:

Aw, this was a really great post. In theory I'd like to write like this also - taking time and real effort to make a good article... but what can I say... I procrastinate a lot and never seem to get something done.

Well first and foremost we as a nation already have a template written down in law and its called the Constitution, specifically Article One, Section Eight that defines federal powers and by implication limits on federal spending...

Hence cutting out the future existence of the EPA would be a good place to start...

BTW 'infrastructure' has morphed into a very nebulous tern now a days so the idea of spending more or cutting spending on 'infrastructure' doesn't actually mean very much...

All this talk of cutting is 'political two step dancing' by many politicos and a serious mission by some...

If Congress was serious about cutting these insane levels of spending (buying votes) then they could first make it known that the word 'entitlement' doesn't exist in the Constitution and second cut the amount of spending by 50% for this fiscal black hole, the Catalog of Federal Domestic Assistance and elimanate 25% of the listed agencies per year for the next four years...

Anonymous-- Thanks for the comment, and for the link to the Carl Smith argument, which tells us quite a bit about what would be needed to get us back to the 2000 level of taxes and spending (a bit over 20% of GDP). Just one word of caution: Going back to the 2000 level of taxes and spending would NOT mean going back to the 2000 level of government services. Because of demographic changes, especially the aging population, returning to 2000 levels of spending and taxes would mean accepting a substantially lower level of government services than we had in 2000. See my Jan 13 post for my take on the numbers.

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